Introduction; what is crowdfunding?
Just as the name implies, crowdfunding is coined from two words ‘crowd and funding’ which respectively means a large number or group of people (crowd) and to finance (funding). Crowdfunding is simply the process whereby different individuals or people contribute little amounts individually for a common goal to be achieved usually through the internet. If a company or person wants to raise money through crowdfunding, they can do so by posting details of their project, business or idea on the crowdfunding website. From the website interested or convinced parties can contribute towards the realization of the project’s goal(s).
Fundraising has a strong history, with origins dating back to the 1700s. The first success story of crowdfunding was recorded in 1997 when a particular British rock band ‘Marillion’ funded their comeback tour via online donations from fans. Inspired by this scenario, ArtistShare became the first dedicated crowdfunding platform in 2000 afterwards the emergence of many fundraising platforms skyrocketed. Ever since then crowdfunding platforms revenues have tripled over the years from hundreds of millions to now billions in dollars. It is also important to mention that in 2012, the then President of The United States Barack Obama, signed the Jumpstart Our Business Startups (JOBS) Act into law. Also known as “the crowdfunding bill,” The goal of the Act is to reduce the regulatory burden on small businesses and to legalize crowdfunding.
How does crowdfunding works?
Normally on crowdfunding websites and applications, an overview of the projects is usually provided. One might need to register with the website to see the pitches, to get more details, or to invest in a particular project. There are usually details such as; how much is to be raised, how much has been raised so far, the share in the business offered (if relevant), what the money will be used for, how long the pitch is open for, how many people have already invested and what will be received as returns on investment. Crowdfunding platforms generate revenues from a proportion of the funds collected.
Conventional Crowdfunding and its shortcomings
Even though the internet has empowered crowdfunding and different investments have kick-started their career activities, there are still some shortcomings that need to be addressed as finance activities progress.
Most fundraising platforms use credit cards for payment from investors, credit card charges alone averages about 3.5% in proportion for just a particular project. For instance, a project that cost about $1billion will result in a loss of $35million that could have otherwise be used for another important part of the project.
Another realization is that not every individual that is interested in the project have a credit card thus limiting the number of potentials as it is a weighted feeling among individuals in the world that not everyone is comfortable with using their credit cards for online transactions.
Furthermore, existing and popular crowdfunding websites/platforms charge about 5% of the fund raised as overhead costs. This alone is not encouraging as crowdfunding platforms alone get about $50,000 for projects that cost about $1million to be executed.
And most importantly, most crowdfunding systems are centralized, curated and all activities such as types of projects acceptable, who creates project funding requests etc. can be controlled.
The Algorand Solution
Algorand is a third-generation blockchain that uses efficient evidence of the Stakeholder Consensus Protocol. It is open, safe, scalable, energy-efficient and fast with a capacity of 1,000 transactions per second (TPS). Transactions are processed and finalized within 5 seconds, with negligible transaction fees currently less than one-tenth of a penny. Algorand features layer one asset support, atomic swaps, and smart contracts. These features combine to create a framework that is well designed for the development of sophisticated and effective decentralized financial systems.
Algorand is transparent and frictionless, too. Anyone with a smartphone can be part of the Algorand network. Over 6 million users participate in the Algorand network.
Requirements for Algorand Crowdfunding System.
As Algorand seeks to correct the shortcomings of existing crowdfunding platforms, the following listed below will be its requirements amongst many others.
- Project Diversity: The fundraising framework should be open to every form of project or cause. Examples of project creators include farmers, musicians, students, businessmen, policymakers, states, corporations, environmentalists and others.
- Borderless And Universal: The crowdfunding framework must be available to project developers and investors (i.e. backers) from all over the world.
The whole crowdfunding process from start to finish can be highlighted in the steps below.
- A project creator uses the web application to create a new crowdfunding project.
- The web application calls the Web Service to create a new crowdfunding project.
- Web service creates a new escrow account and associates it with the stateful TEAL application within the Algorand blockchain.
- An investor uses the Web application to invest in the fund.
- The web application calls the web service to create an investment.
- The web service creates an investment transaction and sends it to the Transaction Gateway.
- The Transaction Gateway notifies the signing wallet associated with the investment account that there is a transaction waiting to be signed.
- The investor uses the signing wallet to inspect and then sign the transaction.
- The signing wallet returns the signed transaction to the Transaction Gateway.
- The Transaction Gateway submits the transaction to the Algorand blockchain
- The Stateful TEAL contract logic transfers the investment amount from the investor’s account to the escrow account.
- Finally, at the successful funding conclusion, the project creator claims the funds accrued in the escrow account. The stateful TEAL contract transfers funds from the escrow account to the project creator’s account.
More details about the design and workflow pattern can be found here.
Algorand continues to promote the influence of blockchain and the merits of decentralized finance by providing creative solutions to traditional problems and also improving existing ways of carrying out financial activities to further enhance the overall quality of human’s financial activities. A decentralized crowdfunding service by Algorand is another way to prove this fact and hopefully, more and more life-changing projects will be carried out using Algorand’s Blockchain technology